Market Update: 2 Apr 2022
Crypto markets continued to rally this week. And as bullish sentiment starts to return, traders increase exposure to more speculative assets.
As a result, ETH and Alts have started to outperform BTC. ETHBTC is higher by 7% this week. SOL is up about 40%. LUNA is up about 27%.
Luna Foundation Guard’s (LFG) BTC buying program, which was accelerated from the middle of March this year, has been pivotal in fomenting this recent bullish sentiment and has effectively placed a psychological floor in the crypto market.
Clearly, the buying itself has helped push prices higher. LFG have accumulated about 30,000 BTC with about half more to go to complete the planned $3bn purchase. And the longer term goal is to accumulate $10bn worth of BTC for the UST reserve.
We think that LFG’s BTC buying program has greater significance beyond the buying itself. The program is a formalised transmission mechanism for the billions raised in the crypto VC space to flow into BTC and other underlying crypto assets. It has set a precedent that will create a positive self-reinforcing cycle as other project treasuries are compelled to do the same.
This effect could be the reason that allows crypto to decouple from other macro assets. Crypto has so far been trading in lock-step with NASDAQ. And we have been concerned about downside in equities as the Fed continues to tighten aggressively and China experiences a hard landing. This inflow could keep crypto prices supported even if macro assets take a hit.
The option market is showing signs of this effect with significant demand for back-end (December-March) topside in BTC and ETH. Most desks (including our own) have been skewed to the topside for risk reversals (buy calls / sell puts). BTC December risk reversals made a sharp move higher from -4.5% to -2.7% (Chart 1).
Our conviction view now is to be short vol as macro factors place pressure on markets while the LFG effect supports the market. We think crypto prices will grind higher towards the second half of the year and any dip with be met with confident buying.
We’ve positioned ourselves short vega (longer-term options) and long rega (long calls / short puts). Also long gamma (short-term options) in ETH and Alts vs. flat in BTC.
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Do look out for our quarterly research piece “Just Crypto” that will be posted in the next few days. This piece will dive deeper into the recent weaponization of Fiat and it’s significance for crypto.
Also, Darius will be Miami for Bitcoin 2022 next week and London the week after. Do feel free to reach out if you would like to meet up or get invites for our events in both Miami and London.